We have really been through a lot over the last nearly three years. And I really think that we should reflect on all of the recent trials, and then applaud ourselves for our collective resilience. We have seen a lot of things happen with the pandemic. We were all watching for threats of recession in 2022. We had rapidly rising interest rates and rampant inflation. We even got to wake up to the first war in Europe in 75 years. And as we enter 2023, we are now having further discussions about recession, interest rate increases, and inflation.
Anyone who tells you that they know how this is going to unfold is just prognosticating. They don’t really know and no one else does either. But we can get ourselves prepared. We can do research, have conversations, educate ourselves, and get situated to quickly be able to capitalize on opportunities.
My message today is really about growth. The message today is about what character traits you can utilize and what methods you can use to continue to build upon your real estate business.
The first character trait we should utilize to make 2023 successful is perseverance. The way to have perseverance is that you have to show up…everyday….regardless of how you feel or what the news says. You have to keep doing the same things that made you successful in the first place or those things that have made other people successful. You have to show up.
Despite the turmoil, the world is still turning. There are still opportunities in the world. If you decide that you are not going to show up every day, if you decide to check out, of if you think that things are so bad that you tell yourself that you are not going to put in any effort any longer or that you are no longer going to invest in real estate, then that is when the real problems start.
In order to find opportunities, you have to be in the market, you have to talk with brokers, you have to talk with debt brokers, and you have to talk with lenders. You also have to continue evaluating the status of the markets that you invest in. Some markets right now have office vacancies that has not been so high since the Internet bubble burst in 2000. On the other end of the spectrum, Atlanta led the US in 2022 with extremely good office absorption numbers. Depending on the markets that you are focused on, you might not even realize that there are still opportunities that you could miss if you decide to hit pause and not show up.
The bottom line is no matter how you are feeling, the thing that you have to keep top of mind in 2023 is that you have to keep showing up no matter what and then you will persevere.
The second character trait we should utilize to make 2023 successful is patience. Patience is not easy, however, we are in an uncertain phase of this economic cycle. Whatever this part of the cycle is – a recession, an economic pause, a re-adjustment to a new normal, or even a Fed induced recession – we have to have patience because we just don’t know at this point.
Regardless of the market, we need to keep in mind that not every deal is a good deal just like not every deal is a bad deal during unknown economic periods. Not every deal is going to warrant big price discounts. The truth is that price discovery has not fully happened in the market at this point. There’s a disconnect right now between what buyers are willing to pay and what sellers are willing to sell for. Since this is happening regularly in the market, and it is hard to know how long it will last, the struggle is how to keep your patience levels high during these times.
For me, I’m doing a lot of analysis and evaluation of deals, but I refuse to be too positive. I am also trying to not be too negative. The 2008 period was a very dark time for a couple of years, but then things started opening up. And the 2010 to 2014 time period presented the best buying opportunities that I could take advantage of during my working career. It was a fantastic ride.
At this point, I don’t know how this economic phase will unfold, so for me, it’s another time to be patient again. It’s time to take a breath, sit back, do a lot of analysis, have a lot of conversations, try to stay positive, and to try to find opportunities that are staring you in the face that you might be able to capitalize on.
Patience is what you need during this part of the cycle.
The third thing that we really need to do is remember that we still have to take action.
Taking action, while broad, also encompasses the things that we have discussed. Taking action means persevering by showing up and it means staying connected to the market. It means that you should go look at properties, see what appraisers are saying about the market, understand the opinions of brokers in the market, and know what investors are looking for.
Another way to take action is to look at deals. I am getting lots of deals in my inbox and while I am quickly deleting most of the deals I evaluate, there are some deals that I still take the next step with. I try to understand the property story and see if I can mitigate any risk related to that story. Taking action means that I analyze deals to see if those deals fit our investment criterion.
I look at around 50 deals a day right now and 48 are usually a very quick no. The 49th deal might be one I review for 5 minutes. And the 50th deals might be one I spend 30 minutes on doing some underwriting and some analysis like checking the market, the crime levels, both outmigration and in-migration, job formation, and any news in the market about layoffs.
If the property meets the initial pass, I dive deeper to determine whether I will actually be able to find debt in the current market for the property. For example, if it’s an office property that looks intriguing, I have to look at both the property and market vacancy. If the property has 90% occupancy, but the rest of the market is 80% occupancy, then I have to be even more conservative in my next level of analysis. If everything checks out, I will make an offer. That’s another part of taking action with real estate. To be fair, I haven’t written an offer in about a month at this point, but I have written numerous offers over the last six months.
The reason I wrote a number of offers in 2022 is because we sold a number of buildings, and we were hoping to defer taxes by completing IRS 1031 exchanges. However, with all of the 1031s that I was involved with, we decided not to do 1031 exchanges in the end for three reasons. The first is that there was a disconnect in the market with debt due to rising interest rates. The second thing is that due to the increased interest rates, that created a disconnect on pricing. The third issue is that we found a number of properties that needed renovation work, but due to inflation and rising costs, we could not accurately estimate our costs, so we decided to pay the tax bill, which we could estimate quite easily rather than invest in a property where we might not find out the additional renovation costs until much later.
This year, I’m looking at things differently. There is still a disconnect in the market for both debt and property prices, but people have acknowledged this disconnect. There is also a lot of news right now about a potential recession. Whether that happens or not, I’m not sure, but if I can find good properties with good returns in markets that we like, and invest with people who I know, like and trust, then those are going to be opportunities that I will take advantage of. I would recommend that you take advantage of those opportunities, as well.
With action, you have to make an offer, but since not every deal is a good deal, you still have to do your due diligence. You can’t just make offers without due diligence. The property may be an asset class you like, in a geography you have targeted, and with a good return, but you cannot go into an offer eyes shut.
Make sure that it is a property that you really want to invest in and that meets your due diligence requirements and your other investment criterion. If it doesn’t meet your requirement, then I recommend you go back to having patience. In my opinion, it is better to have cash right now to be able to take advantage of a future opportunity than it is to do a dumb deal.
Candidly, I am looking for deals daily, but I am being a little more cautious right now because I know I have the tendency to want to do deals. I need to fight that urge to do a deal through patience. I know that I will find the right deals that are going to be accretive to my passive cash flow and my net worth over time, and those deals that will help my investors grow their passive cash flow and their net worth as well. But that requires perseverance, patience, and action.
Until next time, let’s continue growing our passive cash flow and net worth together!